When a pension plan experiences a significant shock, usually due to external economic factors, its administrators will consider the following options:
- Make no changes to the Plan and rely on the current framework to return the Plan to health
- Increase contribution rates for employers and employees in order to bring more money into the Plan
- Reduce benefits such as early retirement, survivor benefits, or adjustments to indexing for members in order to diminish the Plan’s level of liability
In 2009, OMERS was able to rely primarily on a long-term increase to contribution levels to recover from the 2008 financial crisis. This recovery is anticipated to be complete in 2025 and was possible because room existed to raise contribution levels to where they remain today and there were enough active members in the plan as compared to retirees to continue to bring money into the plan.
As of 2019, the Plan operates in a contribution-benefit deficit: there is more money exiting the plan in the form of benefits than is coming in via contributions. Investment returns are making up the difference. By the year 2035, OMERS will pay out $4 billion more in pension benefits than it gathers in contributions.
This means that the plan may not be able to rely on the same strategy in the face of a future economic crisis as it did in 2009. Therefore, OMERS must now confront how future Boards will alter the benefit promise if and when it is forced to do so.
If a future OMERS Board, after assessing the Plan’s framework and raising contribution rates to a maximum, is forced to make changes to benefits, an adjustment to indexing under a shared risk model would potentially be preferable to other reductions. Why? The effect of a reduction in indexing would be spread over a larger number of members and retirees. This means that the impact on each individual member is smaller and would last for a shorter amount of time. If there is no option to reduce indexing, the decision to cut benefits will mean a significant reduction in the value of pensions for members who are working on the date a crisis hits.